New North America trade pact to have ‘moderate’ positive effect

Mexico’s President Enrique Pena Nieto (left) US President Donald Trump (centre) and Canadian Prime Minister Justin Trudeau, are pictured in November 2018 after signing a new free trade agreement in Buenos Aires. (AFP pic)

WASHINGTON: The North American trade pact signed last year will have a “moderate” positive effect on the US economy, an independent US government report said Thursday, an underwhelming endorsement as it faces an uncertain path to ratification.

And the trade deal could actually dent the US auto sector, increasing employment but raising prices while reducing sales and manufacturing output, according the US International Trade Commission.

The report was released as President Donald Trump’s administration instead unveiled rosy projections that the new trade deal would actually cause a boom in auto sector investment, generating tens of billions in new investments and more than 70,000 new jobs.

After a year of tough negotiations, Washington, Ottawa and Mexico City in November signed a new continent-wide trade deal to replace the 1994 North American Free Trade Agreement and revamp rules on manufacturing, digital commerce and labour rights, among other areas.

But the boost to the US economy “is likely to be moderate,” given that most tariffs were already dropped region-wide 25 years ago and because the United States economy is much larger than those of Mexico and Canada, according to the US International Trade Commission.

Under the model used by the US ITC, total US GDP will increase under the agreement by just 0.35%, or around US$68 billion, and the US will gain 176,000 new jobs compared to a scenario in which the current North American trade agreement remains in place, the report said.

“The model estimates that the agreement would likely have a positive impact on all broad industry sectors within the US economy,” the report found.

Not a ‘huge’ impact

Trade between the United States, Mexico and Canada is also likely to increase, according to the report – with US exports rising by about the same amount as its imports from the two partners.

“It’s positive,” Jack Caporal, a trade policy expert at Centre for Strategic and International Studies, told AFP. “It won’t have a huge impact.”

In the auto sector, outcomes are less hopeful.

The US auto workforce would rise by a net 28,000 workers in the United States but auto prices would also rise somewhat – actually cutting auto sales by 140,000.

Automakers would likely cease offering some vehicles as they become more expensive to produce, “which would ultimately decrease consumer choice.”

Signed by the three North American countries in November, the USMCA makes sweeping changes to how autos must be produced in order to enjoy duty-free access within North America.

In particular, the share of a motor vehicle’s content that must be produced in North America was raised to 75% and between 40 and 45% of the content must be produced by workers earning at least US$16 per hour.

Greater domestic production of auto parts would also “draw resources away from other manufacturing sectors and the rest of the US economy,” the report found.

But, in a separate report released hours earlier on Thursday, the office of US Trade Representative Robert Lighthizer said auto manufacturers would instead invest US$34 billion in the United States and add 76,0000 jobs within five years of the date the deal takes effect.